Attorney Verification of Foreclosure Complaints

This is a blatant flaunting and end run around the rule of law. Following a 15 year tradition of fabricating “facially valid” documents, lawyers are having an employee of the law firm sign documents to verify a complaint or other filing.

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THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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Practically every consult I do for attorneys in litigation involves some document that was fabricated, forged and/or robosigned. This trick at misdirection of the court is accomplished by fabricating a document that looks to be facially valid but contains nothing but blatant lies about the people who signed it, the people who offered it, and the lawyers who pursue a false narrative based upon the presumptive validity of documents they know are not just flawed but more importantly fictitious having been fabricated strictly for the purpose of litigation and foreclosure.

Such documents are inadmissible, so the false proffer in court is that they are old valid and authentic documents that were not fabricated for use in court.

The latest turn (although not new) in these events is the execution of a “verification” or other document to be filed with the court by an employee of a law firm that at least initially starts the foreclosure. You may remember that David Stern and others made millions providing this service to banks, servicers and other parties who were involved in the initiation or maintenance of an action to foreclose. While Stern lost his license to practice law, he made off with tens of millions of dollars in fees directly attributable to falsifying documents.

Like the Bernie Madoff situation, some people were thrown under the bus and some people were not. Madoff’s PONZI scheme was not a singular event involving the the largest economic crime ($60 Billion) in Wall Street history. The publication of it gave convenient cover to underwriting banks and other cooperating entities involved in the absolute greatest of all PONZI schemes — the sale of worthless securities issued by empty trusts (over $5 trillion). The PONZI aspect was the same. But Madoff’s scheme was barely 1% of the amount stolen by Wall Street banks. And the Courts have been unwitting accomplices.

The actual “promise to pay” the investors came from the empty trust and not a homeowner or group of homeowners. The debt owed by homeowners was never owed to either the creditor (the investors) nor the trust (which was empty and never operated).  And the payments came from a dynamic dark pool consisting entirely of investor money that was legally and actually supposed to be in a bank account clearly labeled for the REMIC Trust that issued the RMBS — and then managed by a “Trustee” but the Trustee turned out to have no power. All the payments received by investors came from the dark pool — not from borrower payments or recoveries in foreclosure.

All power was vested in the “Master Servicer” which of course was the underwriter who sold the bogus RMBS in the first place — another hallmark of control always present in PONZI schemes. The entire scheme was based upon invested capital being diverted from the trusts — and then covered up by (a) payments out of the dynamic dark pool (PONZI) and (b) originating rather than buying nonconforming loans (a more elaborate PONZI).  The rest of the money was concealed in “trading profits” that are gradually released from the stockpile of money sucked out of the economy by the participating banks.

All of these transactions were “off balance sheet.” Since there were no “real transactions” in “real life” (loans, sales of loans creating a chain) the obvious fraud could only be covered up by getting court orders on a mass scale that assumed the false bank narrative was true. Those court orders and judgments were the first and only presumptively legal document in the entire chain. This is why the banks seek foreclosures at all costs to seal up potential civil and criminal liability for their initial theft from investors. Modifications must be done for purpose of appearances, but they are an intrusion into the business plan of getting as many foreclosures booked as possible.

In order to obtain such orders judges had to be satisfied that the designated forecloser was indeed a “lender” or “Creditor.” In order to do that the banks had to present fraudulent documents. In order to get the fraudulent documents through the system, the bank attorneys knew that in most cases they would only need to present “facially valid documents.” The judges would not look “under the hood.” And borrowers who could see the scam did not have access to information that would lead to the discovery of admissible evidence. Hence most contested foreclosures are still resolved in favor of the co-venturers involved in the fraudulent scheme.

Foreclosure mills are among the people whom the banks will readily throw under the bus (“we’re shocked to discover that our law firm was committing such heinous crimes”). If the law firms were unwilling to provide these “extracurricular services” they never would have retained the business of foreclosures. The banks needed to win because they needed that one legal document that would create the almost conclusive presumption that everything that preceded the judgment allowing foreclosure. And the banks knew that could only be done by fraudulent misrepresentations to the courts, to borrowers, to government agencies including law enforcement that to date has jailed absolutely nobody except Lorraine Brown of DOCX.

So what do I say when represented by an obviously  false document executed by an employee of the foreclosure mill? For example I just received (hat tip to Bill Paatalo) one such “verification” in  which the signor declares that the client is out of town and so the law firm is executing the verification for the client.

The obvious response is that (1) being located somewhere else doesn’t prevent an authorized competent person from doing the verification (2) the absence of a competent witness does not give authority to anyone else to verify as though they were a competent witness (3) the verification does not and probably cannot assert that the signor is competent, to wit:

COMPETENCY consists of (a) OATH (b) PERCEPTION (C) MEMORY and (d) the ability to communicate what the witness saw, heard or otherwise experienced personally.

The law firm clearly has no personal knowledge and therefore is executing the verification just to satisfy the elements of a facially valid verification, when both reason and parole evidence clearly shows that the verification is a sham.

Hence, sanctions should be appropriate against the employee who signed it, the lawyer, the law firm and the “client” if the client knew that this was being done. Of course in most cases the party named as bringing the foreclosure is NOT the client, which is another fraudulent misrepresentation in court that would defeat jurisdiction. The client is always the sub-servicer who takes orders from the “Master Servicer”, i.e.  the underwriter who created bogus trusts to issue bogus mortgage bonds and walked away with trillions of dollars.

 

Securitization for Lawyers

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

The CONCEPT of securitization does not contemplate an increase in violations of lending laws passed by States or the Federal government. Far from it. The CONCEPT anticipated a decrease in risk, loss and liability for violations of TILA, RESPA or state deceptive lending laws. The assumption was that the strictly regulated stable managed funds (like pensions), insurers, and guarantors would ADD to the protections to investors as lenders and homeowners as borrowers. That it didn’t work that way is the elephant in the living room. It shows that the concept was not followed, the written instruments reveal a sneaky intent to undermine the concept. The practices of the industry violated everything — the lending laws, investment restrictions, and the securitization documents themselves. — Neil F Garfield, Livinglies.me

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“Securitization” is a word that provokes many emotional reactions ranging from hatred to frustration. Beliefs run the range from the idea that securitization is evil to the idea that it is irrelevant. Taking the “irrelevant” reaction first, I would say that comes from ignorance and frustration. To look at a stack of Documents, each executed with varying formalities, and each being facially valid and then call them all irrelevant is simply burying your head in the sand. On the other hand, calling securitization evil is equivalent to rejecting capitalism. So let’s look at securitization dispassionately.

First of all “securitization” merely refers to a concept that has been in operation for hundreds of years, perhaps thousands of years if you look into the details of commerce and investment. In our recent history it started with “joint stock companies” that financed sailing expeditions for goods and services. Instead of one person or one company taking all the risk that one ship might not come back, or come back with nothing, investors could spread their investment dollars by buying shares in a “joint stock company” that invested their money in multiple sailing ventures. So if some ship came in loaded with goods it would more than offset the ships that sunk, were pirated, or that lost their cargo. Diversifying risk produced more reliable profits and virtually eliminated the possibility of financial ruin because of the tragedies the befell a single cargo ship.

Every stock certificate or corporate or even government bond is the product of securitization. In our capitalist society, securitization is essential to attract investment capital and therefore growth. For investors it is a way of participating in the risk and rewards of companies run by officers and directors who present a believable vision of success. Investors can invest in one company alone, but most, thanks to capitalism and securitization, are able to invest in many companies and many government issued bonds. In all cases, each stock certificate or bond certificate is a “derivative” — i.e., it DERIVES ITS VALUE from the economic value of the company or government that issued that stock certificate or bond certificate.

In other words, securitization is a vehicle for diversification of investment. Instead of one “all or nothing” investment, the investors gets to spread the risk over multiple companies and governments. The investor can do this in one of two ways — either manage his own investments buying and selling stocks and bonds, or investing in one or more managed funds run by professional managers buying and selling stocks and bonds. Securitization of debt has all the elements of diversification and is essential to the free flow of commerce in a capitalistic economy.

Preview Questions:

  • What happens if the money from investors is NOT put in the company or given to the government?
  • What happens if the certificates are NOT delivered back to investors?
  • What happens if the company that issued the stock never existed or were not used as an investment vehicle as promised to investors?
  • What happens to “profits” that are reported by brokers who used investor money in ways never contemplated, expected or accepted by investors?
  • Who is accountable under laws governing the business of the IPO entity (i.e., the REMIC Trust in our context).
  • Who are the victims of misbehavior of intermediaries?
  • Who bears the risk of loss caused by misbehavior of intermediaries?
  • What are the legal questions and issues that arise when the joint stock company is essentially an instrument of fraud? (See Madoff, Drier etc. where the “business” was actually collecting money from lenders and investors which was used to pay prior investors the expected return).

In order to purchase a security deriving its value from mortgage loans, you could diversify by buying fractional shares of specific loans you like (a new and interesting business that is internet driven) or you could go the traditional route — buying fractional shares in multiple companies who are buying loans in bulk. The share certificates you get derive their value from the value of the IPO issuer of the shares (a REMIC Trust, usually). Like any company, the REMIC Trust derives its value from the value of its business. And the REMIC business derives its value from the quality of the loan originations and loan acquisitions. Fulfillment of the perceived value is derived from effective servicing and enforcement of the loans.

All investments in all companies and all government issued bonds or other securities are derivatives simply because they derive their value from something described on the certificate. With a stock certificate, the value is derived from a company whose name appears on the certificate. That tells you which company you invested your money. The number of shares tells you how many shares you get. The indenture to the stock certificate or bond certificate describes the voting rights, rights to  distributions of income, and rights to distribution of the company is sold or liquidated. But this assumes that the company or government entity actually exists and is actually doing business as described in the IPO prospectus and subscription agreement.

The basic element of value and legal rights in such instruments is that there must be a company doing business in the name of the company who is shown on the share certificates — i.e., there must be actual financial transactions by the named parties that produce value for shareholders in the IPO entity, and the holders of certificates must have a right to receive those benefits. The securitization of a company through an IPO that offers securities to investors offer one additional legal fiction that is universally enforced — limited liability. Limited liability refers to the fact that the investment is at risk (if the company or REMIC fails) but the investor can’t lose more than he or she invested.

Translated to securitization of debt, there must be a transaction that is an actual loan of money that is not merely presumed, but which is real. That loan, like a stock certificate, must describe the actual debtor and the actual creditor. An investor does not intentionally buy a share of loans that were purchased from people who did not make any loans or conduct any lending business in which they were the source of lending.

While there are provisions in the law that can make a promissory note payable to anyone who is holding it, there is no allowance for enforcing a non-existent loan except in the event that the purchaser is a “Holder in Due Course.” The HDC can enforce both the note and mortgage because he has satisfied both Article 3 and Article 9 of the Uniform Commercial Code. The Pooling and Servicing Agreements of REMIC Trusts require compliance with the UCC, and other state and federal laws regarding originating or acquiring residential mortgage loans.

In short, the PSA requires that the Trust become a Holder in Due Course in order for the Trustee of the Trust to accept the loan as part of the pool owned by the Trust on behalf of the Trust Beneficiaries who have received a “certificate” of fractional ownership in the Trust. Anything less than HDC status is unacceptable. And if you were the investor you would want nothing less. You would want loans that cannot be defended on the basis of violation of lending laws and practices.

The loan, as described in the origination documents, must actually exist. A stock certificate names the company that is doing business. The loan describes the debtor and creditor. Any failure to describe the the debtor or creditor with precision, results in a failure of the loan contract, and the documents emerging from such a “closing” are worthless. If you want to buy a share of IBM you don’t buy a share of Itty Bitty Machines, Inc., which was just recently incorporated with its assets consisting of a desk and a chair. The name on the certificate or other legal document is extremely important.

In loan documents, the only exception to the “value” proposition in the event of the absence of an actual loan is another legal fiction designed to promote the free flow of commerce. It is called “Holder in Due Course.” The loan IS enforceable in the absence of an actual loan between the parties on the loan documents, if a third party innocent purchases the loan documents for value in good faith and without knowledge of the borrower’s defense of failure of consideration (he didn’t get the loan from the creditor named on the note and mortgage).  This is a legislative decision made by virtually all states — if you sign papers, you are taking the risk that your promises will be enforced against you even if your counterpart breached the loan contract from the start. The risk falls on the maker of the note who can sue the loan originator for misusing his signature but cannot bring all potential defenses to enforcement by the Holder in Due Course.

Florida Example:

673.3021 Holder in due course.

(1) Subject to subsection (3) and s. 673.1061(4), the term “holder in due course” means the holder of an instrument if:

(a) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(b) The holder took the instrument:

1. For value;
2. In good faith;
3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
4. Without notice that the instrument contains an unauthorized signature or has been altered;
5. Without notice of any claim to the instrument described in s. 673.3061; and
6. Without notice that any party has a defense or claim in recoupment described in s. 673.3051(1).
673.3061 Claims to an instrument.A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.
This means that Except for HDC status, the maker of the note has a right to reclaim possession of the note or to rescind the transaction against any party who has no rights to claim it is a creditor or has rights to represent a creditor. The absence of a claim of HDC status tells a long story of fraud and intrigue.
673.3051 Defenses and claims in recoupment.

(1) Except as stated in subsection (2), the right to enforce the obligation of a party to pay an instrument is subject to:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;
2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;
This means that if the “originator” did not loan the money and/or failed to perform underwriting tests for the viability of the loan, and gave the borrower false impressions about the viability of the loan, there is a Florida statutory right of rescission as well as a claim to reclaim the closing documents before they get into the hands of an innocent purchaser for value in good faith with no knowledge of the borrower’s defenses.

 

In the securitization of loans, the object has been to create entities with preferred tax status that are remote from the origination or purchase of the loan transactions. In other words, the REMIC Trusts are intended to be Holders in Due Course. The business of the REMIC Trust is to originate or acquire loans by payment of value, in good faith and without knowledge of the borrower’s defenses. Done correctly, appropriate market forces will apply, risks are reduced for both borrower and lenders, and benefits emerge for both sides of the single transaction between the investors who put up the money and the homeowners who received the benefit of the loan.

It is referred to as a single transaction using doctrines developed in tax law and other commercial cases. Every transaction, when you think about it, is composed of numerous actions, reactions and documents. If we treated each part as a separate transaction with no relationship to the other transactions there would be no connection between even the original lender and the borrower, much less where multiple assignments were involved. In simple terms, the single transaction doctrine basically asks one essential question — if it wasn’t for the investors putting up the money (directly or through an entity that issued an IPO) would the transaction have occurred? And the corollary is but for the borrower, would the investors have been putting up that money?  The answer is obvious in connection with mortgage loans. No business would have been conducted but for the investors advancing money and the homeowners taking it.

So neither “derivative” nor “securitization” is a dirty word. Nor is it some nefarious scheme from people from the dark side — in theory. Every REMIC Trust is the issuer in an initial public offering known as an “IPO” in investment circles. A company can do an IPO on its own where it takes the money and issues the shares or it can go through a broker who solicits investors, takes the money, delivers the money to the REMIC Trust and then delivers the Trust certificates to the investors.

Done properly, there are great benefits to everyone involved — lenders, borrowers, brokers, mortgage brokers, etc. And if “securitization” of mortgage debt had been done as described above, there would not have been a flood of money that increased prices of real property to more than twice the value of the land and buildings. Securitization of debt is meant to provide greater liquidity and lower risk to lenders based upon appropriate underwriting of each loan. Much of the investment came from stable managed funds which are strictly regulated on the risks they are allowed in managing the funds of pensioners, retirement accounts, etc.

By reducing the risk, the cost of the loans could be reduced to borrowers and the profits in creating loans would be higher. If that was what had been written in the securitization plan written by the major brokers on Wall Street, the mortgage crisis could not have happened. And if the actual practices on Wall Street had conformed at least to what they had written, the impact would have been vastly reduced. Instead, in most cases, securitization was used as the sizzle on a steak that did not exist. Investors advanced money, rating companies offered Triple AAA ratings, insurers offered insurance, guarantors guarantees loans and shares in REMIC trusts that had no possibility of achieving any value.

Today’s article was about the way the IPO securitization of residential loans was conceived and should have worked. Tomorrow we will look at the way the REMIC IPO was actually written and how the concept of securitization necessarily included layers of different companies.

JPM Could Lose Its Charter for Criminal Responsibility in Madoff PONZI Scheme

From www.seekingalpha.com —
JPM’s Madoff entanglement could prompt review of bank charter
The Office of the Comptroller of the Currency (OCC) has reportedly told the office of U.S. Attorney Preet Bharara that a criminal money laundering conviction of JPMorgan (JPM) for turning a blind eye to Bernie Madoff’s Ponzi scheme could trigger a review of the bank’s charter.

Editor’s Note: practically every day we hear of new gross violations of law and intentional misconduct by the large banks who squandered their brand recognition on absurd situations. I have always said that it was impossible for Madoff to have stolen $60 Billion without the knowledge and complicity of the major firms on Wall Street. The revelations of the Madoff theft of money from investors was quickly cast as the largest fraud in history. But it wasn’t. The largest fraud can be counted in the tens of trillions of dollars by all the key players on Wall Street in the PONZI scheme that is falsely called securitization of debt — the proof of which can easily be seen at ground level as investors and borrowers alike are settling claims or winning key verdicts.

The Madoff affair actually provided cover for the Wall Street banks and helped steer the narrative to supposedly reckless and irresponsible behavior when in fact management was deceiving, stealing and profiting from a PONZI scheme that depended upon (a) the sale of mortgage bonds and (b) the sale of mortgage products. Once investors stopped buying bonds and homeowners stopped buying loan products the scheme collapsed and banks had the temerity to say they had lost vast sums of money — a claim that is clearly untrue. They received a bailout for those losses in the form of TARP and other programs from the U.S. treasury, the Federal reserve and other sources, when it was investors, insurers, borrowers, taxpayers, guarantors and other parties who were taking losses having given tens of trillions of dollars to the Wall Street banks in money and property.

Now the chickens are coming home to roost. And the cries of well-known analysts that the banks are being treated unfairly is losing credibility by the hour. The banks are finally losing the narrative and the association of politicians with them is proving more costly than the benefit of taking money from the bank lobbyists to protect the banks from prosecution arising out of behavior that would land any ordinary mortal in jail for a long time.

Lawyers defending foreclosure cases should take note and use this information pointing out what the court already knows: that there was fraud at the top in the selling of worthless mortgage bonds deriving their value from defective mortgages, there was fraud in the robo-signing, LPS fabrication of documents, the intentional destruction of cash equivalent promissory notes that we now know were defective, in the words of the investors, insurers, government guarantee agencies, insurers and rating agencies.

PRACTICE NOTE: It should be noted and stated openly that any pleading, affidavit or testimony from those banks is inherently untrustworthy and should be subject to intense scrutiny. The remedy of forfeiture in Foreclosures is extreme according to the public policy of every state and should be strictly construed against the party seeking that remedy. Every legislature has put that statement in its laws. Instead, the narrative has been that deadbeat borrowers were clogging the system with bogus defenses.

It never occurred to the courts, the lawyers and even the borrowers that the courts were clogged with bogus claims of ownership, bogus accounting for receipts and disbursements, the existence of co-obligors when the note payable was converted to a bogus bond payable, and wrongful Foreclosures that the banks and the regulators know were wrongful, obtained settlements, consent orders and more promises from people whose business model is all about lying, manipulation of markets and theft.

PONZI SCHEMES: Liability Of Lawyers and Accountants to be Considered

“Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, (March 3, 1882 – January 18, 1949), commonly known as Charles Ponzi, was an Italian businessman and con artist in the U.S. and Canada. His aliases include Charles Ponci, Carlo and Charles P. Bianchi.[1] Born in Italy, he became known in the early 1920s as a swindler in North America for his money making scheme. Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage.[2][3] In reality, Ponzi was paying early investors using the investments of later investors. This type of scheme is now known as a “Ponzi scheme“. His scheme ran for over a year before it collapsed, costing his “investors” $20 million.” — see Wikipedia.

Editor’s Comments: The Supreme Court is going to hear a case involving a Ponzi Scheme that once upon a time was considered huge, until it was dwarfed by Madoff, which in turn was dwarfed by the Wall Street firms. The interesting thing about the original Ponzi Scheme is that it involved the promotion of false derivatives, which is exactly what happened in the mortgage meltdown.

Ponzi’s scheme was based upon the false premise that certain certificates could be purchased at one price in one place and sold at a higher price in another place because markets vary from one place to another. Had he actually believed the false premise he would have invested according to plan.

But there is no question from anyone about the fact that the plan was unworkable and Ponzi knew it. So he never invested the money and simply relied upon continuing sales of his “securities” in a private investment scheme to fund the illusion of payments as promised; as sales progressed he was able to pay investors their expected return in order to encourage additional sales and word of mouth success. When investors stopped buying the scheme quickly collapsed. Look back on the mortgage bond market. When investors stopped buying, the entire system collapsed.

Ponzi’s derivatives were fake. They were not derivatives because he never invested in the plan. He just kept the money and managed it until the scheme collapsed. The Mortgage Bond market was virtually identical to Ponzi except that it was more complex in terms of the number of moving parts. The mortgage bonds and credit default swaps were not derivative products either because the bonds never derived their value from actual mortgage loans. The “derivatives” that were allegedly exempt from securities regulation, the insurance products that were allegedly exempt from insurance regulation, were in fact not derivatives in most cases. The REMIC tranche that issued the bonds was a creature of the investment banks and the money advanced by investors never made it to the trust.

Like Ponzi the investment banks pocketed the money and then funded only what they needed to fund to give investors the false impression that their money was being invested in the manner required by the enabling documents — the Pooling and Servicing Agreement, Prospectus and the use of an Assignment and Assumption agreement that was used to cover the movement of money. Everything they did was designed to encourage the sales of additional bogus bonds. Profits were made primarily by the cloud of players created by the Wall Street banks, while the losses from the inherent false premise of the “investment” plan fell to investors and borrowers in “loans” that were virtual gifts to cover up the theft of principal by the banks.

Now the question before the Supreme Court is not whether the principals are liable to victims of the fake investment scheme, but whether the professionals and affiliates are liable for their negligence or fraud in helping the Ponzi scheme to progress. To put it in lay terms, the question before the court is whether an accountant or lawyer for the Ponzi scheme can be liable if they negligently or knowingly assisted in the Ponzi scheme.

The very question testifies to the state of our tolerance for misbehavior and why our current foreclosure mess has failed to yield criminal prosecutions on mass fraud. Iceland put their bankers in jail and now enjoys a growing economy and a stable banking environment. In the United States there has been nothing. The FBI has stated that 80% of mortgage fraud is committed by the banks. Yet prosecutions have only been on the other 20%.

So the question is whether a lawyer or accountant negligently or knowingly assisted in defrauding the public should be liable for their actions. To put it more simply, will that lawyer or accountant be liable for actions that we know were wrong and caused and contributed to extensive damage, and without which the scheme could not have operated. The answer seems obvious — except when you consider our awe of large schemes. The larger the scheme, the less likely is the prosecution. This in turn has resulted in the incentive for Ponzi operators to become as large as possible. In turn that means the incentive to escape prosecution requires that the scheme have massive scope and injuries.

If the Supreme Court hands down a decision favorable to investors, it will likely be that the liability extends only to private investment schemes that are not fully registered with the SEC. And if that happens then investors will be able to prove the Ponzi scheme and prove the accountants and lawyers were criminally and civilly liable.

This has everything to do with the mortgages and foreclosures. If the loans were window dressing on a Ponzi scheme instead of real loans by the originators and underwritten in accordance with industry standards, then the securities (mortgage bonds) issued from Wall Street were not derivatives. The impact travels all the way down to the closing table at which the closing agent applied money from investors held by investment banks to fund loans that were doomed to failure not only because of economic factors but also because the control over whether the loans would fail lay with the investment banks — not with the borrower, the lender investor, or anyone else.

If the loans were faked — in terms of NOT being funded in accordance with the indentures on the bonds — then clarity opens up in the mortgage mess, to wit: the loans were made from the pocket of investment banks and not the REMIC trusts. They were using investor money as their own, which is why the banks received insurance proceeds and proceeds of credit default swaps, and the proceeds of sale of the bogus mortgage bonds to the Federal Reserve.

The damage to investors occurred as a result of alleged loans. But the loans were in essence payment to or on behalf of people who believed they were borrowers when in fact they were being used in the Ponzi scheme — and had been exposed to risks that they knew nothing about because despite Federal and State law to the contrary, disclosure was withheld about the identity of the parties to the “loan” transaction, the fees paid to numerous parties, and the nature of the roles of the players that created the appearance of a loan transaction and a false chain of securitization.

The investors money was used to fund the alleged loans and fees but the documentation gave the loan to the Wall Street banks — a practice prohibited by the Truth in lending Act and the deceptive lending practices acts in many states. The point here is that the documentation — the note and mortgage — were executed in favor of a party who was a non-lendor nominee of a non-lender nominee of the investor lenders. And that is why it is nearly impossible to get a valid satisfaction of mortgage on payoff or on short-sale. The “satisfaction” is directed at a recorded instrument that is a lie, which means that the mortgage was not satisfied because it was never a perfected lien in the first place. The money currently being paid on the payoff is going to parties who were strangers to the mortgage transaction.

Thus the decision by the Supreme Court in the Stanford Case could and should have impact on the auditors and attorneys and other professionals that currently enjoy a weird sort of immunity despite their obvious wrongdoing in deceiving the public and enabling the fraud. A proper audit would have revealed that bonds on the balance sheet of the banks were in fact owned by investors and were worthless creating a potential liability that should have been reported. A proper review by the ratings agency would have identified the proposed plan as nonconforming when in fact they granted a triple A rating. These “third parties” were paid to violate the standards of their profession and they knew it. Whistle blowing memos went unheeded in all  such organizations.

The ability of investors to prove the existence of a Ponzi scheme would have huge consequences on the foreclosure procedures. The focus would properly shift from “deadbeat” borrowers to felonious tricksters. A proper ruling in the Stanford case would thus open up the possibility for direct communication between investors and borrowers, enabling settlements that would enable investors to mitigate their damages on a large scale with the help of borrowers who are still willing to sign “modifications” that would result in the recording of actual perfected mortgage encumbrances eliminating nearly all of the foreclosure docket.

Stanford Ponzi Scheme Goes to Supreme Court

Deadline Approaching, U.S. Is Weighing More Charges in Madoff

SEC Waking Up: Madoff Conspirators Face Charges — Now About Those Mortgage Bonds

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After a long slumber of non-regulation and failure to bring charges for securities fraud the SEC is finally getting into the “game” — the culture of fraud on Wall Street. When the Madoff story broke it was inconceivably large. $60 Billion generated through a PONZI scheme — selling securities or taking money under a prospectus that promised that the flow of money would be invested for the benefit of the investors. The hallmark of such schemes is that they eventually fail when people stop buying the securities or depositing money. At that point the money deposited with the fraudster eventually fails to provide the funds necessary to keep paying investors the return they were promised and fails to cash out investors who want their money back. It fails because the scheme was either not to invest the money at all or to seek cover under investments that clearly were never going to be in compliance with the prospectus or any other standard of investment.

 

So now we ask again, what about the MBS players? Mortgage-backed securities dwarfed the Madoff scheme. $13 trillion-$20 trillion or more was taken from investors under a prospectus that promised funding of mortgages of the highest quality. Like Madoff, the investment bankers took what they wanted before they used the money to pay back investors or fund mortgages. And when they did fund mortgages they intentionally inserted false entities as lenders — entities with no relationship to the investors. The effect was a conversion of the intended investment into an unsecured loan to either the investment bank or the borrower and no claim to bring against the borrower,directly or indirectly. The secured interest was destroyed and then claimed by the Banks. The claim for repayment was also converted to the benefit of the Banks, who then “traded” in their proprietary account in which the gains were kept by the Bank and the losses were tossed over the fence to the investors under a pooling and servicing agreement that was ignored except for laying off the losses on the investors.

 

When investors stopped buying MBS the scheme promptly collapsed. Investment banks still continued to advance money to investors directly or indirectly through the subservicers. They did this for the same reason any PONZI operator pays his “investors” (victims) — to keep them buying into the investment pool and to create the illusion that nothing is wrong. At the same time the Banks were advancing money on alleged mortgage loans, they were declaring loans in default, foreclosing and claiming losses in their “ownership” of the mortgage bonds they had sold to pension funds. Eventually even the taxpayer became an unwitting and unwilling investor to save the world from the brink of economic collapse. It was believed the Banks were in trouble because they had recklessly lost money in risky trades. This was never true.

 

And now the massive deluge of Foreclosures continues the fraud. Just as the investors were not represented at the closing of alleged mortgage loans, they are not represented in Foreclosures. The banks are foreclosing in their own names — cutting off the investors completely when the bank takes title to the property at the foreclosure sale — and cutting off insurers, CDS counter parties, guarantors, and other co-venturers and co-obligors from seeking refunds or forcing the repurchase of the loans that were never subject to any form of underwriting standards of the industry.

 

The money they took off the top, the money they received from third parties who waived rights to collect from the borrower, was converted from a trade on behalf of their principals — the investors (victims) who thought that their money was being deposited with the investment bank to fund a REMIC trust. The investor money became the bank’s money. The investors’ ownership of loans, notes, mortgages, and bonds became the property ofthe banks and so it stays today, except for the settlements with investors who are suing and except for the long list of fines and penalties leveled on the banks for pennies on the dollar. The pending BOA Article 77 hearing in which the insurers are pointing to the incestuous relationship between the “trustees” of the REMIC trusts and the investment banks is starting to come back and haunt both the trustee, who knew there was no funded trust, and the bank that was merely Madoff by another name.

 

So the payments due to investors stopped or were cut back without credit for the money received by the investment banks as agents of the investors. Thus the account receivable of the investor is kept away from the courts because it would show vastly different balances than the balance claimed by the servicer’s and banks. The balance is much lower than what is represented in court. And it probably has been eliminated entirely when the net is cast over principals and agents’ receipt of funds. The Foreclosures are wrong. They simply continue the fraud and ratify by judges’ orders the theft of money, loans and what should have been notes payable to the investors or the REMIC trust that was never funded — and therefore could never have purchased the loans.
If the money was applied properly most of the investors would be covered by the money that still remains in the banks that they are claiming as their own capital. Applied properly in accordance with generally accepted accounting principles, this would reduce the account receivable from the loans. It would also by definition reduce the corresponding account payable from the borrowers, making modification and settlement easy —but for the interference of the servicers and investment banks who are trying desperately to hold onto their ill-gotten gains.

Pensioners Will Feel the Pinch from Illegal Mortgages and Foreclosures

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Editor’s Comment:

There are many people whose opinion produces the resistance of government to rip up the banks that got us into this economic mess. They all say government is too big, that we already have too much regulation and that Obama is the cause of the recession. Their opinions are based largely on the fact that they perceive the borrowers as deadbeats and government assistance as another “handout.” 

But when it comes down to it, it’s easy to make a decision based upn ideology if the consequences are not falling on you. Read any news source and you will see that the pension funds are taking a huge hit as a rsult of illegal bank activities and fraudulent practices leaving the victims and our economy in a lurch.

The article below is about public pensions where the pension funds and the governmental units took a monumental hit when the banks sucked the life out of our economy. TRANSLATION: IF YOU DEPEND UPON PENSION INCOME YOU ARE LIKELY TO FIND OUT YOU ARE SCREWED. And even if you don’t depend upon pension income, you are likely to be taxed for the shortfall that is now sitting in the pockets of Wall Street Bankers.

Think about it. If the Banks were hit hard like they were in Iceland andother places (and where by the way they still exist and make money) then your pension fund would not have the loss that requires either more taxes or less benefits. And going after the banks doesn’t take a dime out of pulic funds which should (but doesn’t) make responsible people advocating austerity measures rejoice. They still say they don’t like the obvious plan of getting restitution from thieves because the theives are paying them and feeding them talking points. And some of us are listening. Are you?

Public Pensions Faulted for Bets on Rosy Returns

By: Mary Williams Walsh and Danny Hakim

Few investors are more bullish these days than public pension funds. While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

But to many observers, even 7 percent is too high in today’s market conditions.

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.” Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.

They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers. In New York, the Legislature this year cut pensions for public workers who are hired in the future, and around the country governors and mayors are citing high pension costs as a reason for requiring workers to contribute more, or work longer, to earn retirement benefits.

In addition to lowering the projected rate of return, Mr. North has also recommended that the New York City trustees acknowledge that city workers are living longer and reporting more disabilities — changes that would cost the city an additional $2.8 billion in pension contributions this year. Mr. North has called for the city to soften the blow to the budget by pushing much of the increased pension cost into the future, by spreading the increased liability out over 22 years. Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years. Faulty assumptions can mask problems, and municipal pension funds are often so big that if they run into a crisis their home cities cannot afford to bail them out. The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators. (New York State announced last week that it had earned 5.96 percent last year, compared with the 7.5 percent it had projected.)

Worse, many economists say, is that states and cities have special accounting rules that have been criticized for greatly understating pension costs. Governments do not just use their investment assumptions to project future asset growth. They also use them to measure what they will owe retirees in the future in today’s dollars, something companies have not been permitted to do since 1993.

As a result, companies now use an average interest rate of 4.8 percent to calculate their pension costs in today’s dollars, according to Milliman, an actuarial firm.

In New York City, the proposed 7 percent rate faces resistance from union trustees who sit on the funds’ boards. The trustees have the power to make the change; their decision must also be approved by the State Legislature.

“The continued risk here is that even 7 is too high,” said Edmund J. McMahon, a senior fellow at the Empire Center for New York State Policy, a research group for fiscal issues.

And Jeremy Gold, an actuary and economist who has been an outspoken critic of public pension disclosures, said, “If you’re using 7 percent in a 3 percent world, then you’re still continuing to borrow from the pension fund.” The city’s union leaders disagree. Harry Nespoli, the chairman of the Municipal Labor Committee, the umbrella group for the city’s public employee unions, said that lowering the rate to 7 percent was unnecessary.

“They don’t have to turn around and lower it a whole point,” he said.

When asked if his union was more bullish on the markets than the city’s actuary, Mr. Nespoli said, “All we can do is what the actuary is doing. He’s guessing. We’re guessing.”

Vermont has lowered its rate by 2 percentage points, but for only one year. The state recently adopted an unusual new approach calling for a sharp initial reduction in its investment assumptions, followed by gradual yearly increases. Vermont has also required public workers to pay more into the pension system.

Union leaders see hidden agendas behind the rising calls for lower pension assumptions. When Rhode Island’s state treasurer, Gina M. Raimondo, persuaded her state’s pension board to lower its rate to 7.5 percent last year, from 8.25 percent, the president of a firemen’s union accused her of “cooking the books.”

Lowering the rate to 7.5 percent meant Rhode Island’s taxpayers would have to contribute an additional $300 million to the fund in the first year, and more after that. Lawmakers were convinced that the state could not afford that, and instead reduced public pension benefits, including the yearly cost-of-living adjustments that retirees now receive. State officials expect the unions to sue over the benefits cuts.

When the mayor of San Jose, Calif., Chuck Reed, warned that the city’s reliance on 7.5 percent returns was too risky, three public employees’ unions filed a complaint against him and the city with the Securities and Exchange Commission. They told the regulators that San Jose had not included such warnings in its bond prospectus, and asked the regulators to look into whether the omission amounted to securities fraud. A spokesman for the mayor said the complaint was without merit. In Sacramento this year, Alan Milligan, the actuary for the California Public Employees’ Retirement System, or Calpers, recommended that the trustees lower their assumption to 7.25 percent from 7.75 percent. Last year, the trustees rejected Mr. Milligan’s previous proposal, to lower the rate to 7.5 percent.

This time, one trustee, Dan Dunmoyer, asked the actuary if he had calculated the probability that the pension fund could even hit those targets.

Yes, Mr. Milligan said: There was a 50-50 chance of getting 7.5 percent returns, on average, over the next two decades. The odds of hitting a 7.25 percent target were a little better, he added, 54 to 46.

Mr. Dunmoyer, who represents the insurance industry on the board, sounded shocked. “To me, as a fiduciary, you want to have more than a 50 percent chance of success.”

If Calpers kept setting high targets and missing them, “the impact on the counties won’t be bigger numbers,” he said. “It will be bankruptcy.”

In the end, a majority decided it was worth the risk, and voted against Mr. Dunmoyer, lowering the rate to 7.5 percent.


NO SURPRISE: MADOFF CONNECTION WITH SEC and “Mortgage Backed Bonds”

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO TITLE AND SECURITIZATION SEARCH, REPORT, ANALYSIS ON LUMINAQ

EDITOR’S NOTE: Well we already knew that his son was working in SEC enforcement so it should come as no surprise that the SEC attorney that was involved in payouts to victims was also involved with Madoff. In fact, it should be no surprise that hundreds of “channels” were involved on Wall Street because Madoff never made a trade. It was a PONZI scheme, but he was well connected and knew perfectly well that the GREAT SECURITIZATION SCAM in mortgage-backed bonds was also a scam.

So while the SEC and others generally like to grab people like this, and others like to blow the whistle and see the scheme fall apart, the SEC, being the recipient of a 29 page TEN YEAR OLD report prepared by one of the most knowledgeable analysts on Wall Street, did nothing. That report showed that what Madoff was saying was impossible from any angle and everyone on Wall Street knew for a fact that they had never seen or heard of a single trade from the Madoff “accounts.” Even the mega banks that had Madoff money parked in them knew they had not seen a trade and were talking and writing about it in emails and over cocktails at lunch. What Madoff didn’t realize was that powers bigger than him — and he had a lot of power — were using him as the scape goat to divert attention from their own scam. AND IT WORKED!

The plain truth is that if anyone blew the whistle on Madoff, then the entire mortgage scam would have come to a halt because Madoff would have traded his knowledge of the securitization scam for leniency or even immunity. He miscalculated, like all PONZI artists, because after 30 years he thought both his scheme and the securitization scheme would go on forever — a kind of mutually assured destruction tacit agreement existed between the mega banks and Madoff. Neither one ratted the other out even though both knew what was going on.

So now everyone is in a hurry to get the foreclosures done so we can put this nasty episode behind us, except it just won’t go away. The Banks, in control of government, are successfully arguing that if they are allowed to slowly convert this mess into another mess, the economy will be better off and that less people will be hurt. Using that logic, Madoff and all other PONZI operators should have been left alone. Ask anyone who got nicked by a PONZI scheme — they all secretly wished it could have gone a little longer so they would have gotten their money back — even though that meant that someone else’s money was “paying” them.

This is why PEOPLE need to act in the their central role as the boss of this sovereign country. It says so right in the constitution in clear unambiguous words. PEOPLE need to act, using their powers of removal, election, petitions, and referendums to take control of the government away from those who are using the current occupants of offices that pull the levers of power and put it into the hands of people who understand that if they pull the same crap, they too will fall under the axe of the real boss in this country — its voting citizens.

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NY TIMES

S.E.C. Chairwoman Under Fire Over Ethics Issues

By LOUISE STORY and GRETCHEN MORGENSON

The Securities and Exchange Commission took a beating two years ago for failing to detect Bernard L. Madoff’s multibillion-dollar Ponzi scheme during the decades that he ran it.

Now, its chairwoman is coming under Congressional fire for hiring as the S.E.C.’s general counsel someone with a Madoff financial interest — David M. Becker, who participated in matters involving how the scheme’s victims would be compensated.

The revelations about Mr. Becker’s role have raised fresh questions about ethical standards and practices at the agency, where Mary L. Schapiro was brought in as chairwoman two years ago with a mandate to strengthen its enforcement unit. Ms. Schapiro will appear before Congress on Thursday to discuss the matter. Questions about Mr. Becker arose last month after Irving H. Picard, the trustee overseeing the Madoff case, sued him and two of his brothers to recover $1.5 million of the $2 million they had inherited in 2004 from a Madoff investment by their late mother. Mr. Becker’s financial ties to Madoff had not been publicly disclosed until that suit.

Mr. Becker said that he advised Ms. Schapiro and the chief ethics officer of his financial interest in a Madoff investment account, “either shortly before or after” joining the agency in February 2009.

Last Friday, H. David Kotz, the agency’s inspector general, announced that he would investigate the potential conflicts in Mr. Becker’s role as a Madoff recipient who was also the S.E.C.’s general counsel and senior policy director involved in decisions relating to the Ponzi scheme. Ms. Schapiro requested the review, a commission spokesman said.

Lawmakers have also asked Ms. Schapiro for details of her discussions with Mr. Becker about his Madoff account when she hired him in 2009. Ms. Schapiro missed a deadline on Monday for those responses. An S.E.C. spokesman said Ms. Schapiro declined to comment on Tuesday.

“One of the things the S.E.C. does is hold companies to a very high standard with regards to transparency and disclosure,” said Representative Randy Neugebauer, Republican of Texas, who is one of four Republican lawmakers asking Ms. Schapiro about her dealings with Mr. Becker and his disclosures. “We think it’s important that the same integrity exists within the S.E.C., ensuring that people working there do not have conflicts of interest and that here is a process to vet those issues and make sure they are taken care of in a way that gives confidence.”

Perhaps the most significant Madoff matter involving Mr. Becker is a proposed reversal of the agency’s recommendation on how to compensate victims of the scheme, according to two people briefed on the S.E.C.’s discussions who asked not to be identified because they were not authorized to discuss the matter. While the agency had agreed on a deal that would return to investors only the money they had put into their Madoff accounts, Mr. Becker argued that the commission should change its stance to allow victims to keep some of the gains their investments had generated, since the investment would have grown somewhat over time even in a low-interest account. The Becker family would benefit from this approach.

Mr. Becker did not return a call for comment.

In correspondence with lawmakers late last month, Mr. Becker also said that he alerted the ethics office about his family’s Madoff investment again that May after he received a letter from a number of law firms representing Madoff victims asking that the commission change its proposed compensation formula. Among the issues are whether Madoff investors who withdrew money before the fraud was exposed must return some of their proceeds — and if so, how much — to other investors.

“I recognized that it was conceivable that this issue could affect my financial interests because the issue could affect the trustee’s decision to bring clawback actions against persons like me,” Mr. Becker wrote in response to lawmakers. The ethics officer approved his participation, he said. That officer reported directly to Mr. Becker and spent only 25 minutes reviewing the matter, according to Congressional staff members briefed on the discussions who requested anonymity because they also were not authorized to discuss the matter publicly.

Congressional investigators want to know if Mr. Becker and Ms. Schapiro took all the necessary steps outlined in government ethics rules. Under the United States code, for example, Ms. Schapiro may have been required to make a written determination that Mr. Becker’s financial interest was not substantial enough to affect his job performance. A spokesman for the S.E.C. said that such a waiver would not be required unless Mr. Becker had been found to have a substantial financial conflict.

Congress also asked Ms. Schapiro whether she discussed Mr. Becker’s Madoff account with other staff members or commissioners and if she took up the matter with officials in the federal government’s Office of Government Ethics, or the commission’s ethics counsel.

“As the government official responsible for appointing Mr. Becker to his position in 2009, what steps did you take to manage the appearance of or actual conflict of interest presented by Mr. Becker’s financial interest in the Securities Investor Protection Corporation’ liquidation?” asked a March 1 letter signed by four Republican members of the House Financial Services Committee. They are Spencer Bacchus of Alabama, Jeb Hensarling of Texas, Scott Garrett of New Jersey and Mr. Neugebauer.

In any Ponzi scheme, there are victims who withdraw money before the fraud is exposed. There are many such Madoff investors and determining how much they may keep is being sorted out in two places. Some investors are fighting in court to be entitled to the amount of money on their final Madoff statements, though they have been unsuccessful so far. Another battle involves how much customers can be compensated by the Madoff trustee and the Securities Investor Protection Corporation, a government entity that helps recover money for customers of failed brokerage firms. The S.E.C. oversees SIPC; neither matter has been decided.

Mr. Becker’s late mother, Dorothy, invested $500,000 with Mr. Madoff’s company; when she died in 2004, her three sons transferred the money into a new account at the firm. The next year, the investment was worth $2.04 million and they withdrew it. Mr. Picard said that the family should be allowed to keep the original $500,000 investment but return $1.54 million — all of the gain — to compensate other victims.

If the S.E.C. gets its way, Mr. Becker and his brothers would be allowed to keep more than that to compensate them for the time the money was invested with Mr. Madoff. How much more is unknown because details of the commission’s proposal have not been disclosed.

Both SIPC and Mr. Picard, the trustee for the Madoff estate, have proposed that the customers who withdrew funds before the fraud was uncovered should be allowed to keep only as much money as they put in. Initially, the full commission agreed and approved that approach in early 2009, according to the two people briefed on the discussions.

Mr. Becker joined the commission in February that year. By spring, he began meeting with lawyers for Madoff customers seeking a different formula. They wanted to let longer-term investors keep more money than those who had money with Mr. Madoff for shorter periods. Mr. Becker apparently dismissed arguments that investors were entitled to the amounts Mr. Madoff had listed on their final statements.

In the summer of 2009, Mr. Becker did reverse the commission’s earlier decision, however. His legal staff came up with a new proposal to reflect the length of time the money was invested, and the commissioners approved it at the end of the year. Some at the agency who worked with SIPC expressed dissent about the change, according to the people briefed on the deliberations.

Stephen P. Harbeck, the chief executive of SIPC, confirmed that his investor protection unit and the S.E.C. had initially agreed that victims should be able to keep only the money they had originally put into the Madoff firm. “Then they refined their opinion,” he said on Monday, referring to the S.E.C. He said that he did not know who had pushed for the change.

The S.E.C.’s definition, Mr. Harbeck said, would benefit anyone who withdrew more money from their Madoff accounts than they had put in. Mr. Becker’s family would be among them.

Accounting for Damages: Madoff Ruling May Affect Homeowner Claims

Editor’s Note: Looking further down the road, when the Ponzi aspect of the Mortgage Meltdown is fully revealed, it will become obvious that both yield spread premiums and the proceeds of credit default swaps, insurance and federal bailout are subject to claims by homeowners. The Trustee’s conclusion as affirmed by the Judge’s ruling in the Madoff case will undoubtedly come up as a resource or support for persuasive argument about how those proceeds should be allocated.
The Judge’s conclusion was obvious even if it was controversial. The Trustee appointed to do the accounting decided that the Madoff assets should be apportioned on the basis of the actual dollar loss instead of what was shown on the Madoff statements to investors. Since the entire scheme was fraudulent, the statements sent out to investors were a lie and it would be inappropriate to allow any distribution to any investor for more than what they had invested.
Similarly, the proceeds from payments on credit default swaps, yield spread premiums (both at the borrower and investor levels), insurance and bailout money will need to be allocated to each individual loan to credit the homeowner debtor against the original obligation as evidenced by the note.
This allocation will not be as simple as the Madoff case for several reasons. But the Madoff allocation underscores that you can’t get a court to award you “damages” if you suffered no actual monetary damage.It is the same thing as the standing argument. Virtually all foreclosures for the past several years have been brought by non-creditors who produced either fabricated or irrelevant paperwork.
So the parties who purchased credit default swaps using money (profit) obtained from the yield spread premium gained from lying to the investor and the homeowner about the true intrinsic yield value of the transaction should not be allowed any allocation unless the money for the CDS came from a source other than these Ponzi transactions.
Additional factors in the allocation might include subjective issues if a court determines that risk of loss should be apportioned amongst all participants instead of just between the investors and the participants in the securitization chain. And there is that nagging problem of two Federal claims, one from TILA and the other from the SEC regulations, which appear to create a claim on the same pool of  proceeds by both the homeowner debtor and investor creditor.
March 2, 2010

Madoff Judge Endorses Trustee’s Rule on Losses

A federal bankruptcy judge in Manhattan has approved the fiercely disputed method used by the court-appointed trustee to calculate victim losses in Bernard L. Madoff’s enormous Ponzi scheme.

In a decision filed on Monday, Federal Bankruptcy Judge Burton R. Lifland ruled that losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.

Judge Lifland rejected emotional arguments by hundreds of defrauded investors seeking to have their claims based on the balances shown on their final account statements, sent out just weeks before Mr. Madoff was arrested. He pleaded guilty last March and is serving a 150-year prison term.

The ruling is a setback for investors like Adele Fox of Tamarac, Fla., an 87-year-old retired school secretary who was widowed in 1986. Mrs. Fox withdrew more than her original capital for living expenses, but still had nearly $3 million on her account statement when the fraud was discovered.

Under Judge Lifland’s ruling, she is not eligible for cash from the Securities Investors Protection Corporation, the industry-financed organization that provides limited protection for customers of failed Wall Street firms.

“My health has been a mess,” Mrs. Fox said on Monday. “I can manage, more or less, but if I have to go into a facility, what would I do? All my life savings, it all went into Madoff and it is all gone.”

She added, “I don’t want to seem like a pig — I just want this insurance that I think I’m entitled to.”

If losses were based on the final account statements, Mrs. Fox and almost every Madoff investor would be eligible for up to $500,000 from SIPC — not as insurance, Judge Lifland noted, but as a cash advance against their fair share of any recovered assets.

The total of those account balances — the wealth investors believed they had saved — was nearly $65 billion, by far the largest financial fraud loss in history.

But those statements “were bogus and reflected Madoff’s fantasy world of trading activity,” Judge Lifland wrote in his opinion.

As such, they cannot reflect legitimate “securities positions” on which claims can be based, he said.

Instead, Judge Lifland endorsed the approach of the Madoff trustee, Irving H. Picard. The differences between how much investors put into their accounts and the amount they took out are “the only verifiable amounts” reflected in the Madoff firm’s records, Judge Lifland said of that method.

That ruling gives hope to investors like Simon P. Jacobs, a businessman in New York who wrote the judge to support Mr. Picard’s approach. Mr. Jacobs said that he “would be thrilled to get 25 percent of my cash back — while these opponents have gotten 100 percent back, at least.”

Those who withdrew all their initial investment before the collapse “still feel they have lost money,” he said. “But in truth, they did not lose any money. When the dust settled, they had gotten all their money back” while investors like him did not, he said.

He added: “Critics say that Mr. Picard is not representing them — well, he’s representing me to the hilt.”

Mr. Picard has said that the out-of-pocket cash losses for people like Mr. Jacobs total slightly more than $20 billion — still a record amount, but a bit closer to the multibillion-dollar amount Mr. Picard hopes to collect in the Madoff liquidation process.

Investors who did not retrieve all or, in many cases, any of their initial capital from Mr. Madoff, argue that they should have first claim on whatever assets Mr. Picard collects — since it was their money that Mr. Madoff used to cover the withdrawals and fictional profits he paid to others.

And Judge Lifland agreed.

While many Ponzi schemes have been resolved in the courts through the “cash in, cash out” method, it is rare for a Ponzi scheme to occur inside a SIPC-protected brokerage firm. Judge Lifland acknowledged that “the complex and unique facts of Madoff’s massive Ponzi scheme” defied any simple analysis.

Indeed, he added, “the parties have advanced compelling arguments in support of both positions,” sometimes using the same court cases and statutory language to support their opposing claims.

But after “a thorough and comprehensive analysis of the plain meaning and legislative history of the statute, controlling Second Circuit precedent, and considerations of equity and practicality,” he endorsed the trustee’s approach.

“It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff” when determining victim losses, he said.

The ruling was promptly criticized by Helen Davis Chaitman, a lawyer for several hundred Madoff victims and a victim herself.

“Unless and until this decision is reversed, no American who invests in the stock market with the hope of retiring on his savings, has any protection against a dishonest broker,” Ms. Chaitman said in a statement released by a coalition of Madoff victims.

She added: “If we learned anything in the last two years, it was that Wall Street will manipulate the law to enrich itself at the expense of every honest, hard-working American taxpayer. Now we know that no American can rely on SIPC insurance.”

But Stephen P. Harbeck, the president of SIPC, said the court recognized that Mr. Picard’s approach “does the greatest good for the greatest number of people, consistent with the law.”

David J. Sheehan, a lawyer for Mr. Picard, said he and the trustee expected an appeal and “hope it will be dealt with in an expedited way.”

Its normal path would be through the United States District Court to the Second Circuit Court of Appeals, both in Manhattan. But if the appeal is allowed to bypass the district court, it could speed up the resolution of the dispute.

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